Russia and Saudi Arabia, due to an agreement brokered by the major oil producing countries to cut global oil production, appear to be largely responsible for a steady decline in global crude supplies and subsequent uptick in fuel prices. Because the need for transportation makes gasoline and diesel fuel a necessity, rising prices tend to hurt the wallets of average consumers. Lacking a nationwide public transportation system, gasoline-powered vehicles offer Americans a sense of freedom and empowerment, thus a rise in gasoline prices is particularly enraging to Americans. Donald Trump’s so-called oil rant certainly plays into those sentiments, even if the oil industry receives such price increases as positive developments. Clearly, perception plays a big role in how shifts in energy prices are received and analyzed, but what actually matters is the real world consequences.
When energy price go up, individual consumers, who are real life people, have to pay more or they must restrict their use of gasoline, which often means driving fewer miles. On average, American drivers drive about 13, 500 miles per year. An average fuel economy of nearly 25 miles to the gallon mean a statistically “normal” American driver can expect to pay an extra $540 per year for every dollar increase in gasoline. Obviously, those who drive more and/or have less efficient vehicles will pay more, while those who drive less and/or have more efficient vehicles will pay less, but the cost will only vary by a multiple or two. For a full-time worker working forty hours a week, a quarter wage increase is needed to offset a dollar increase in gas prices. In some respects, it is a small number. Low-wage earners and those already facing personal budget shortfalls, however, experience such an increase as a major burden.
Naturally, swings in energy prices are an unwelcome burden on anyone’s finances and can seriously impact the discretionary spending of consumers. On the one hand, it is only one item on a list of personal and business expenses people must address, whether the impact of rising energy prices is high or low. On the other hand, even if cost increases can be avoided by driving less, the reason energy prices receive so much attention is that they force people to confront how limited their budgets actually are, which compels them to consider how they spend gas and money. Obviously, greater budgetary awareness can be beneficial for a debt-burdened society, but it also discourages people from spending money on non-essentials, including forgo-able necessities. Weak consumer spending, in turn, undermines the overall economy.
Because the oil industry needs to sustain its infrastructure, which includes payroll, explore new areas of operation, and offer competitive incentives to investors, energy prices need to stay above a certain minimum. Recognizing crude oil can be extracted cheaply in many foreign lands, such as Saudi Arabia, that minimum price must also allow domestic oil produces to remain competitive. As such, energy prices need to meet this minimum, yet remain low enough to encourage efficiency on behalf of the oil industry. Oil price must also remain high enough to encourage consumers to diversify their consumption of energy sources. Sufficient to say, energy prices rarely hit a happy median. Unfortunately, the reality that nationalized companies are major players in the oil market, adds a strong geopolitical flavor to oil prices.
With a government-ruled economy straggled by corruption and fueled largely by the oil industry, Russia always needs high oil prices. Factoring Russian involvement in the Syria Civil War and Western sanctions, Russian desperately needs high oil prices. Although Saudi Arabia’s oil operations are far more efficient than those of Russia, the Saudi Arabia economy, if it can be called an economy, has the same dependency on oil. The Kingdom also has a far more generous socialist system than Russia, which the government must fund in order to secure control over its population. Ironically, Russia and Saudi Arabia have the same economic interests when it comes to oil prices, yet they also have diametrically opposing geopolitical interests when it comes to Iran and Syria. In contrast, Saudi Arabia and the US, a close ally, have diametrically opposing economic interests, even though they have nearly the same geopolitical interests.
As such, the oil market is never governed by market forces alone. It is subject to the conflicting interests of nation-states and the every-shifting tides of geopolitical oceans. Obviously, all markets are impacted by government decisions, but Russia and Saudi Arabia have proven that they can assert direct control over the global oil supply and market. Unlike the US, which has largely freed its oil industry, the likes of Russia, Saudi Arabia, and the rest of OPEC use their government monopolies to seize control of the global oil market and assert their governmental interests above those of actual consumers and actual producers. Consumer are focused on the price of oil, but the control these authoritarian governments enjoy should upset consumers the most. It also a reminder that the world’s population should be alarmed by the control other authoritarian governments, such as China, have over other industries as well as the control private virtual monopolies have amassed.
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